When it comes to creating wealth, compound interest is your ally. While most of us will have learned the concept of compounding interest in our Maths classes at school, many seem to have forgotten those lessons by the time they have some money to invest. Time alone is what gives compound interest its power and if you do not leave investments in place for elongated periods of time, this ally never gets to work for you.
In this age of “instant gratification” those selling investment assets and/or facilitating investments (Stockbrokers, Investment Platforms, Investment App’s…) are focusing on the “now” and the potential results “a few weeks or months from now”, but this is not investing, this is gambling and gambling never benefits from the power of compound interest. Also, as the Casino’s of Las Vegas and everywhere else around the world prove, it is only the user that is “gambling”, those providing the facilities are in the guaranteed profits business.
The secret to accumulating wealth for those of us that will never invent the next big thing or write the next great book is to set aside money on a regular basis, to eventually accumulate enough to be able to stop working and enjoy our desired lifestyle for the remainder of our days. Doing this does allow compound interest to work for us.
You do not necessarily need double figure or more annual returns to accumulate wealth and so you do not need to take the sizeable risks that chasing those returns entails. What you need is a decent annual return and time to allow compound interest work its magic.
To give you some examples, to following table illustrates the number of years needed to DOUBLE the value of a lump sum investment based on a cross section of annual returns: -
Note: Years rounded up or down to nearest 1
Once compound interest is working for you, accumulating the assets needed to be financially free (wealthy) does not require huge annual returns, just time.
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